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Pricey Japan is best game in town for US casinos

[HONG KONG] Pricey Japan is the best game in town for US casinos. The likes of Las Vegas Sands and MGM Resorts had already vowed to spend US$10 billion each on a complex there. Tokyo's tough rule book appeals to operators with a wary watchdog at home, given compliance risks in less mature markets. But the world's third-largest economy poses its own problems, and a bidding war could hurt future returns.

The industry's excitement has been rising since the government legalised gambling in 2016. Analysts and officials say operators are now upping their bets across the country: Last week the city of Yokohama announced rivals vying for concession rights there are offering to splurge close to US$12 billion. The reports don't reveal who is going all in, but investors can guess.

"Our commitment to Japan is immense. It will be lots and lots of rooms, many, many rooms," Sands' president Robert Goldstein told analysts in April. Wynn Resorts and MGM have also talked up their plans.

As bidders become more aggressive, so too the regulators. The authorities want to pre-empt gambling addiction in an aging society that blows more than US$150 billion a year in pachinko arcades. Officials are copying strict jurisdictions like Singapore. There will be entrance fees and visit quotas, onerous taxes, and restrictions on advertising and on "comps" – freebies to lure high rollers. After the first decade, prefectural governments can review the arrangement every five years and could add harsher restrictions.

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Casinos can opt for freer, fast-growing markets like Cambodia or the Philippines instead. But companies with roots in Nevada and Massachusetts are liable for their conduct outside US borders; gaming magnates like Sheldon Adelson know relaxed regimes bring their own risks. For them, Japan is a rare opportunity to expand without such worries.

Yet Japan is not cheap. Investors must factor in high labour and construction costs, and then there's the question of how enthusiastic the locals will be. A 2017 Las Vegas survey found Japanese tourists were the stingiest, spending less than half Chinese peers. Morgan Stanley researchers estimate a Japanese casino could produce a 14 per cent to 20 per cent return on invested capital, "as long as capex remains below US$10 billion". If that number gets much higher, it might bring bad luck.


Casino operators seeking to build a resort in Yokohama have submitted development plans advocating close to US$12 billion investment, the city's authorities announced on May 27.

Multiple operators are willing to spend more than US$10 billion to develop a casino resort in Osaka, Tokyo, or Yokohama, according to a note published by Morgan Stanley on May 19, citing a series of recent meetings with major casino companies looking at opportunities in the country.

Japan legalised casinos in 2016 and is developing specific regulations for casino resorts at three locations across the country. Las Vegas Sands, Wynn Resorts, MGM Resorts, Melco Resorts and Entertainment, Galaxy Entertainment and Genting Singapore have all expressed interest in developing a complex, according to filings and media reports.